TRADE: NAFTA - lessons for Australia

by Peter Westmore

News Weekly, January 31, 2004

With Australia on the brink of negotiating a Free Trade Agreement with the United States, it is timely to look at the North America Free Trade Agreement (NAFTA), signed about ten years ago, and introduced in January 1994.

At the time of its introduction, NAFTA was trumpeted as a necessary step to lift Mexico into the level of developed nations, and as a substantial benefit to the United States and Canada, by giving them access to Mexico's growing population of about 105 million people, and ultimately, access to the markets of Central and South America.

Unconvinced

Nine years on, most Mexicans, Canadians and Americans believe that NAFTA has been a "dud".

In 1999, Harris Polls examined how the people saw the operation of NAFTA. In the US, 57% of adults said NAFTA has been good for Mexico but not for the US. Conversely, an overwhelming 73% of Mexicans say the deal was good for America but not for them.

Even supporters of NAFTA, such as the Economist magazine and the free market Citizens for Tax Reform in Canada, freely admit that most people in Canada do not believe that NAFTA has benefited them.

In a recent survey of NAFTA, the Economist expressed the view that NAFTA had been over-sold in the early 1990s, and was never likely to have much benefit for the US or Canada, while prospective benefits for Mexico depended on institutional change in Mexico which has just not occurred. (January 3, 2004)

Joseph Stiglitz, the Nobel Prize-winning economist who worked for the World Bank from 1997-2000, said recently that celebrations of NAFTA's 10th anniversary are "far more muted than those involved in its creation might have hoped."

While the fears of some American politicians and labour union activists that NAFTA would lead to huge job losses in the United States had not materialised - US unemployment is lower than for many years - Stiglitz said that the treaty had been harmful.

He said that while Mexico benefited in the early days, especially with exports from factories near the United States border, those benefits have waned, both with the weakening the American economy and growing competition from China.

"And as all but one of Mexico's major banks have been sold to foreign banks, local small- and medium-sized enterprises - particularly in non-export sectors like small retail - worry about access to credit."

Contradicting the optimistic view of the Economist, which said that Mexico had "benefited greatly" from NAFTA, Stiglitz also said growth in Mexico over the past 10 years has been a bleak one percent on a per capita basis, far poorer than earlier in the century.

From 1948 to 1973, Mexico grew at an average annual rate of 3.2 percent per capita.

By contrast, in the 10 years of NAFTA, even with the East Asian crisis, Korean growth averaged 4.3 percent and China's 7 percent in per capita terms.

Stiglitz also pointed out that after NAFTA had been signed, US producers had attempted to erect trade barriers to keep Mexican agricultural and manufactured produce out of the country, squandering much of the goodwill which surrounded the agreement.

Additionally, in its trade negotiations with its neighbouring countries, the US had insisted that controls over the flow of capital and control of industries be removed.

He concluded, "All of this has important implications for the proposed Free Trade Area of the Americas, and for countries thinking of signing onto bilateral trade agreements with the United States.

"Signing a free trade agreement is neither an easy nor an assured road to prosperity. The United States has said it does not want agriculture or non-tariff barriers to be on the table in these talks.

"But while it refuses to give in on these points, it wants Latin American countries to compromise their national sovereignties and to agree to investor 'protections.' In fact, the United States has been demanding that countries fully liberalise their capital markets just as the International Monetary Fund has finally found that such liberalisation promotes neither growth nor stability in developing countries.

"Unfortunately, many of the smaller and weaker countries will probably agree in the quixotic hope that by linking themselves to America, they will partake of America's prosperity."

This is almost exactly the principle espoused by the Prime Minister, John Howard, in supporting Australia's entry into a free trade agreement with the United States.